The need for reform by the Indian government is unquestionable, but UK and Indian analysts are divided in their opinions as to how much the market is going to improve in the short term.

Jayendra Nayak, executive trustee at the Unit Trust of India in Mumbai, thinks the prospects for Indian industry are very reasonable”.

While he concedes the risks in the market are still evident, he does not believe they are as strong as two to three years ago. There is still potential for growth and returns are “more than compatible” with the risks involved, he says. Transaction costs are estimated to have halved from 5% to 2% in the last two to three years and are still falling.

Ayaz Ebrahim, director at Indosuez Asset Management Asia in Hong Kong is “broad-ly positive” for the next 12 months and expects earnings growth will give the market some “upward momentum”.

The Indosuez stance on India is quite positive. GDP is ex-pected to increase by 5.8% in the first half of 1997 and by 6% in the first half of 1998. The macro-economic outlook will “improve significantly” with the cash reserve ratio cuts by The Reserve Bank of India.

The introduction of the central depository system, says Adrian Mowat, director of Martin Currie Investment Management in Edinburgh, is very positive for the market. “It should help with corporate governance as companies find it increasingly difficult to manipulate shares and investors will find it easier to vote with their feet” he says.

India, Mowat believes, is in a catch up situation with a dire need for tax reform. He predicts tax revenues should increase from 22% to 35% in the long-term. But interest rates will be the key driver, for the next couple of years.

“I think long-term interest rates are going to decline by an-other 100 basis points or so,” he says.

He also believes, however, that there is too much optimism about the economy picking up in the second half: “People think the cultural growth is reasonably robust which they think will be enough to kick start the economy – I don’t think it is.”

Mowat sees the monetary environment as good news for equity investors. But, he warns, “some companies are going to produce some very nasty numbers” and advises buying very defensive companies.

Martin Currie is currently overweight in electricity and telecom utilities and “very overweight in the service sector” and Mowat views consumer non-durables, and consumer staples as attractive sectors this year.